Initial Public Offerings (IPOs) are pivotal events in a company’s journey allowing it to tap into the public capital market to fuel growth and expansion. In Nepal, the regulatory authority responsible for overseeing IPOs is the Securities Board of Nepal (SEBON). SEBON plays a crucial role in meticulously inspecting, evaluating and approving IPO applications submitted by companies. However, it’s important to note that not every company that applies for an IPO receives SEBON’s approval. In this context, investors are presented with a significant responsibility. With SEBON’s rigorous scrutiny serving as a baseline, investors must conduct their own comprehensive research before making investment decisions. This research includes analysing the financial performance of the company, evaluating the competency and experience of the management team, studying industry trends, and assessing the competitive landscape.
In recent years, there has been a notable surge in the number of individuals opening dematerialised (Demat) accounts. These accounts facilitate the electronic holding of shares and have become a popular choice among investors. Before the Covid 19 pandemic, the number of Demat accounts and applicants for Central Registration Number (CRN) in banks was relatively modest. However, as lockdown measures were lifted, banks witnessed a significant increase in the number of loans being taken out for share purchases. Investors are increasingly leveraging bank loans to participate in IPOs. Currently, there are approximately 1,981,598 Demat accounts in Nepal, highlighting the growing interest in the stock market.
In the first half of 2023, the Asia-Pacific region maintained its position as the global leader in IPO activity. This region accounted for approximately 60% of the total global IPO volume and value. During this period, there were 371 IPOs in the Asia-Pacific region, raising a combined total of $39.4 billion. While this represented a slight decline of 2% in the number of IPOs, the total value decreased significantly by 40%.
Technology, industrials and materials sectors dominated the IPO listings, reflecting the diverse landscape of companies going public. Mainland China, in particular, has been focused on rejuvenating its economy post-Covid lockdown. However, several challenges, including the lingering economic impact of the pandemic, reduced consumer spending power, manufacturing and export hurdles, and escalating US-China tensions, have cast a shadow of uncertainty over the IPO landscape. As a result, many significant IPOs are currently on hold, awaiting more favourable market conditions. Hong Kong, too, has experienced reduced listing activity in the first half of the year, influenced by interest rate hikes and weakened equity prices of IPOs completed in the previous two to three years.
Within the context of Nepal, there have been recent instances of IPOs garnering significant attention and oversubscription. For example, the IPO of Nepal Reinsurance Company was oversubscribed by 1.57 times within just two days of its issuance, even as the Nepal Stock Exchange (NEPSE) index was down by 3.3674% during that period. Similarly, the IPOs of NIC Laghubitta Bittiya Sanstha and Sadhana Laghubitta Bittiya Sanstha saw oversubscription levels of 5.16 times and 16.44 times, respectively.
While the increasing number of IPO applicants is indicative of growing investor interest, it also brings forth its own set of challenges. One prominent issue is the lack of transparency and regulatory oversight in the market. This absence of robust regulations and supervision can lead to concerns about market integrity and investor protection. Additionally, the limited liquidity in the market has resulted in heightened stock price volatility. This volatility has had consequences for investors, including the potential for not receiving expected dividends and the constant fear of incurring losses.
Further, the market continues to be dominated by a few large companies, limiting opportunities for diversification. Additionally, Nepal’s IPO market presents both opportunities and challenges for investors. While there is the potential for high returns, investors must navigate a market with limited liquidity, a lack of regulatory oversight, and concerns regarding transparency. These factors have contributed to a climate skepticism among economic experts and serious investors, underscoring the need for greater transparency, regulation, and investor education in Nepal’s growing IPO market.
In this issue of Business 360, we spoke to a few experts to get their views on this recent trend of IPOs. Excerpts:
Dharma Raj Sapkota
President, Stock Brokers’ Association of Nepal
There is a frenzy for IPOs at the moment. How would you describe this phenomenon?
The current frenzy for Initial Public Offerings (IPOs) is quite evident. In my view, while this surge in interest is positive, it’s essential to consider refining the process by implementing the book building mechanism before the actual announcement of an IPO. I believe that such an approach could prove to be beneficial for all parties involved. The introduction of a book building mechanism will undoubtedly have its advantages. By allowing investors to express their interest and willingness to buy shares within a certain price range, it will lead to a more accurate and well-informed pricing of the IPO. This, in turn, will enhance transparency and build investor confidence. As the process unfolds, investors will gradually gain a clearer understanding of the dynamics of investing in the share market.
What I find particularly promising is the fact that investors are now diversifying their investments across various sectors. This practice can significantly mitigate the risks associated with concentrating investments in a single sector. This trend underscores a growing awareness among investors about the importance of a well-rounded portfolio. In light of these developments, I hold a positive outlook on the increasing enthusiasm among investors. It reflects a healthy and growing interest in financial markets and wealth creation. However, I believe that alongside this trend, there should be a concerted effort to provide proper education about the intricacies of investing in the share market.
Educated investors are empowered investors, and ensuring a solid understanding of the risks and rewards of the market will be vital to sustaining this positive momentum. To summarise, while the current IPO frenzy is a promising sign of investor engagement, there’s an opportunity to enhance the process through the implementation of a book building mechanism. This, combined with a focus on educating investors, could lead to a more informed and sustainable growth in the investment landscape.
With the economy on a downturn, do you believe IPOs to be a good instrument to invest in?
Your question about whether IPOs are a suitable investment instrument during an economic downturn is quite pertinent. From my perspective, I firmly believe that IPOs can hold potential value regardless of the economic climate. However, a crucial factor in making them beneficial lies in ensuring fair pricing through the implementation of the book building mechanism. I hold the view that the timing of IPOs doesn’t necessarily hinge on the state of the economy. Every phase, including downturns, presents its unique set of opportunities. It’s imperative to approach IPOs with a long-term perspective. Companies going public during an economic downturn might possess resilience and innovation that positions them for substantial growth once the economy rebounds.
Talking about the pricing aspect, the book building mechanism holds significant promise. By allowing investors to express their interest within a certain price range, it can lead to a more accurate valuation of the IPO. This precision is crucial for both the issuing company and potential investors. It fosters transparency and helps prevent overvaluation or undervaluation, both of which could have adverse effects. In the context of economic downturns, these periods often unveil hidden gems. Investors who thoroughly research and understand the causes of temporary downturns can identify companies that are well-poised to thrive once conditions improve.
It’s about recognising the potential for growth beyond the current challenges. I stand by the idea that IPOs can be a valuable investment avenue regardless of economic conditions. Fair pricing achieved through the book building mechanism is essential for their success. Moreover, downturns should be seen as opportunities to uncover promising ventures with the potential for future growth. It’s about being well-informed, forward-thinking, and ready to seize the advantages that every market phase presents.
IPOs basically mean raising public funds; how robust is the due diligence when allowing companies to introduce IPOS?
It’s absolutely necessary to conduct thorough due diligence before allowing companies to introduce IPOs and raise public funds. This ensures that the companies seeking to go public meet the essential prerequisites and standards, thereby safeguarding the interests of both investors and the market as a whole. The due diligence process is a critical step in maintaining the integrity of the financial markets. It involves a comprehensive assessment of various aspects of the company, including its financial health, business operations, management team and overall strategy. This scrutiny is essential to verify that the company has a solid foundation and is capable of responsibly managing the funds it raises from the public.
In addition to the initial due diligence, there should be an ongoing monitoring mechanism in place. Companies’ circumstances can change over time, and it’s important to ensure that they continue to meet the necessary criteria. Regular checks and evaluations can help prevent fraudulent activities and ensure that investors’ funds are being utilised appropriately. The role of regulators in this process is of paramount importance. Regulators should not only set the guidelines for due diligence but also actively oversee the process. They need to ensure that companies are thoroughly vetted before being allowed to raise funds through IPOs. Moreover, regulators should also prioritise the safety and interests of investors.
This involves creating an environment where investors can confidently participate, knowing that their investments are going into companies that have been properly examined and are being closely monitored. Due diligence is an essential aspect of the IPO process. It involves both an initial assessment and continuous monitoring to ensure that companies are fit to raise public funds. Regulators play a pivotal role in enforcing these standards and ensuring that investors are making safe and informed investment choices. Ultimately, a robust due diligence process contributes to the overall health and credibility of the financial markets.
What are the market risks associated with investment in IPOs?
From my perspective, there are several risks associated with investing in Initial Public Offerings, and it’s essential for investors to be fully aware of these potential challenges before making investment decisions. One of the key risks that investors should be mindful of is the potential for overvaluation of the company’s shares. The valuation of a company’s shares is often influenced by market sentiment, prospects and demand for its products or services. However, there’s a risk that the market might become overly optimistic about the company’s potential, leading to an inflated valuation. When the market eventually corrects itself, there’s a possibility that the stock price might drop to a more reasonable level, causing losses for investors who bought in during the overvalued phase.
Moreover, the inherent price volatility associated with IPOs can also pose a risk. In the early stages of trading, stock price can experience significant fluctuations due to the excitement and uncertainty surrounding the new listing. This volatility can expose investors to sudden price swings, potentially impacting their investments. Insufficient information about the company can be another challenge. Unlike established companies with a track record, IPOs might have limited historical financial data available for analysis. This lack of information can make it challenging for investors to accurately assess the company’s financial health, growth potential and overall stability. Making informed decisions becomes more difficult when the necessary data isn’t readily accessible.
What is the government’s role in mitigating the associated risks with IPOs?
There are several steps that the government could consider implementing to ensure a more secure and transparent environment for investors participating in the IPO market. First and foremost, I believe that the establishment of a robust regulatory body is crucial. This regulatory body should have the authority to oversee and monitor the entire process of IPOs. This includes scrutinising the company’s financials, verifying the accuracy of information provided in the prospectus, and ensuring that the company meets all necessary requirements for going public. A major concern when it comes to IPOs is the pricing of shares. To address this, the government should closely monitor the pricing mechanism to prevent overvaluation or undervaluation of shares. Implementing stringent guidelines and rules around the pricing process can contribute to a more accurate valuation, ultimately safeguarding the interests of both the company and the investors.
Transparency is another vital aspect that the government should focus on. It’s important to ensure that companies issuing IPOs are compelled to maintain transparency throughout the entire process. This includes disclosing relevant information about their financials, business operations, and risk factors. When investors have access to complete and accurate information, they can make more informed decisions and better assess the potential risks. Moreover, the government can play a pivotal role in setting norms and standards for issuing IPOs. By establishing clear guidelines and requirements that companies must adhere to before going public, the government can enhance the quality of companies entering the IPO market.
This can help filter out companies that might not be adequately prepared or suitable for public listing. I believe the government holds a significant responsibility in ensuring the safety and credibility of the IPO market. This involves creating a strong regulatory framework, closely monitoring pricing, enforcing transparency, and setting industry norms. By taking these steps, the government can help mitigate the associated risks and foster an environment that encourages healthy investment in IPOs.
It has been pointed out that despite some companies not performing well, have been given approval to issue IPOs. How do you view this?
It’s crucial for the regulator to adopt more transparent and prudent norms when granting approval for companies to launch IPOs. This step is essential to ensure that only companies with a reasonable level of stability and potential are permitted to enter the market. One of the primary aspects that the regulator should focus on is transparency. Clear and well-defined criteria should be established for companies seeking to issue IPOs. These criteria could include financial benchmarks, operational performance and growth trajectory. By setting stringent standards, the regulator can filter out companies that might not be adequately prepared to meet the demands of public markets.
Additionally, the pricing of IPOs is a key concern. It’s important to ensure that the valuation of shares is done fairly and accurately. To address this, the regulator should emphasise the execution of the book building mechanism. This approach allows investors to express their interest in a specific price range, leading to a more precise valuation of the IPO. This can help prevent overvaluation and ensure that investors are offered a reasonable entry point. Furthermore, continuous monitoring by the regulator is paramount. Even after the approval has been granted, there should be a mechanism in place to review the performance of the company.
If a company’s performance deteriorates significantly after receiving approval, the regulator should have the authority to reconsider its decision and potentially revoke the permission to issue IPOs. My take on this matter is that the regulator’s role is pivotal in maintaining the integrity of the IPO market. Transparent and prudential norms for approval, a focus on fair pricing through book building, and ongoing oversight are essential to ensuring that only deserving and promising companies enter the IPO arena. This not only protects investors but also contributes to the overall health of the capital market and also the economy of the country.
“The pricing of IPOs is a key concern. It’s important to ensure that the valuation of shares is done fairly and accurately. To address this, the regulator should emphasise the execution of the book building mechanism. This approach allows investors to express their interest in a specific price range, leading to a more precise valuation of the IPO. This can help prevent overvaluation and ensure that investors are offered a reasonable entry point. Furthermore, continuous monitoring by the regulator is paramount. Even after the approval has been granted, there should be a mechanism in place to review the performance of the company.
If a company’s performance deteriorates significantly after receiving approval, the regulator should have the authority to reconsider its decision and potentially revoke the permission to issue IPOs. The regulator’s role is pivotal in maintaining the integrity of the IPO market”
Dhani Ram Sharma
Joint Secretary, Ministry of Finance
There is a frenzy for IPOs at the moment. How would you describe this phenomenon?
In the current scenario, w a’re witnessing a significant frenzy surrounding Initial Public Offerings (IPOs), and it’s truly fascinating to observe this phenomenon unfold. From my perspective, it’s indicative of a noteworthy shift in investor behaviour and corporate strategies, both of which have far-reaching implications for the financial landscape. I’ve noticed that investors are becoming increasingly informed about opportunities within the share market. This stands in stark contrast to the past, where many would simply park their funds in conventional savings accounts, cooperatives or other traditional savings vehicles. It’s encouraging to see this transformation, as it signifies a growing awareness of the potential benefits that investing in the stock market can offer.
What I find particularly commendable is the growing trend of investors diversifying their portfolio. This strategic move toward spreading investments across various sectors and industries can play a pivotal role in mitigating the risks associated with concentrated investments. Rather than channelling substantial resources into a single sector, individuals are now more inclined to distribute their investments, ultimately fostering a healthier and more balanced financial ecosystem. On the corporate front, it’s intriguing to witness companies utilising IPOs as a means to expand their business operations. By opting to go public, enterprises can tap into a fresh stream of capital that can be channelled toward growth and innovation. This marks a departure from the traditional reliance on bank loans and internal equity. Embracing IPOs as a mechanism for resource mobilisation not only reduces dependency on limited financing options but also opens up avenues for strategic expansion and increased market presence.
Overall, I view this IPO frenzy as a positive trend, indicative of a heightened engagement level among investors. There’s an evident eagerness to explore new avenues of wealth creation and financial empowerment. However, in this exciting context, I believe it’s paramount to provide comprehensive education about the intricacies of the stock market. Equipping investors with the knowledge and skills needed to make informed decisions will be instrumental in maximising the benefits of this evolving investment landscape. Also, I find it truly encouraging to witness the surge in interest and activity surrounding IPOs. As both investors and corporations embrace this trend, it’s crucial that we foster an environment of education and awareness. By doing so, we can ensure that individuals make well-informed investment choices and that companies effectively utilise IPOs as a mechanism for growth and resource optimisation.
With the economy on a downturn, do you believe IPOs to be a good instrument to invest in?
Considering the current state of the economy, particularly its downturn, the question of whether IPOs are a viable investment instrument demands careful consideration. From my standpoint, I view short-term downturns or fluctuations as integral components of the broader business cycle. Rather than approaching them solely as negative occurrences, it’s crucial to recognise the potential they hold for introducing fresh opportunities into the investment landscape. History has shown that each downturn, regardless of its scale, has been accompanied by new prospects for growth and profit. These opportunities often arise from the unique challenges presented by the economic environment. As such, I firmly believe that investors should adopt a forward-looking perspective, focusing on the potential that these downturns bring to the table.
However, I am also of the opinion that making informed investment decisions during such times requires a deep understanding of the underlying causes of these temporary setbacks. By delving into the root causes, investors can gain valuable insights into the dynamics at play and the areas that might see resurgence in the future. This knowledge is crucial for identifying sectors or industries that could rebound strongly as the economy stabilises and begins its upward trajectory once again.
Maintaining an optimistic outlook is key. While it’s easy to be swayed by the immediate challenges posed by an economic downturn, it’s important to remember that these downturns are part of a broader cyclical pattern. By staying optimistic and focusing on the potential for recovery and growth, investors can position themselves to capitalise on the eventual rebound. I believe that IPOs can indeed be a favourable instrument for investment even during periods of economic downturn. However, the decision to invest should be grounded in a thorough understanding of the underlying factors contributing to the downturn. With the right knowledge and a positive outlook, investors can identify the sectors and opportunities that are likely to flourish as the economy regains its strength.
IPOs basically mean raising public funds; how robust is the due diligence when allowing companies to introduce IPOS?
The concept of Initial Public Offerings (IPOs) is centred around raising funds from the public but it’s imperative to ensure a robust process of due diligence before granting companies the opportunity to introduce IPOs. In my view, this careful scrutiny serves as a vital safeguard to maintain the integrity of the market and protect the interests of both investors and the broader financial ecosystem. When companies seek to go public through an IPO, there should be a set of essential prerequisites they must meet. These prerequisites, often outlined by regulatory bodies, are designed to assess the company’s financial health, governance practices, operational history and growth prospects. This due diligence process is crucial in ensuring that companies seeking public investment are not only well-prepared but also capable of fulfilling their obligations to their shareholders.
The regulator’s role in overseeing this process cannot be overstated. Their responsibility extends beyond merely allowing companies to raise funds; they must also ensure that the investment environment remains smooth and secure for all stakeholders involved. By rigorously evaluating the company’s financial statements, business plans, risk factors, and other pertinent information, regulators can identify any red flags or concerns that might compromise the safety and trustworthiness of the investment opportunity. Furthermore, this due diligence process plays a critical role in maintaining investor confidence.
When investors are assured that companies undergo thorough scrutiny before entering the market, they are more likely to perceive IPOs as credible investment avenues. This trust is essential for sustaining healthy participation in the market and fostering a sustainable investment ecosystem. The requirement for due diligence in the context of IPOs is not just a formality; it’s a fundamental necessity. It ensures that companies seeking public funding are well-prepared and have met the necessary benchmarks. By placing this responsibility on regulators and ensuring that companies fulfil certain criteria, we contribute to a more secure, reliable, and transparent investment landscape that benefits both companies and investors alike.
What are the market risks associated with investment in IPOs?
Certainly, investment in Initial Public Offerings (IPOs) does come with its fair share of market risks and it’s essential to be fully aware of these potential pitfalls before considering such an investment avenue. From my perspective, several significant risks are associated with IPO investments, each of which demands careful consideration. One of the primary risks that investors face is the possibility of overvaluation. This is a critical concern because the valuation of a company undergoing an IPO is often influenced by the perceived prospects and demand for its products or services. However, there’s a risk of the company being overhyped, leading to an inflated valuation that doesn’t truly reflect its actual worth. This becomes particularly problematic if the broader market corrects itself, causing the stock price to plummet to a more realistic level. This can result in substantial losses for investors who bought into the stock at its peak.
Additionally, the issue of allotment is a notable risk. Sometimes, due to high demand and oversubscription, not all investors who wish to participate in an IPO are allocated shares. This can be disappointing for investors who were hoping to secure a position in the company but end up empty-handed due to the allocation process. The volatility of stock prices is another significant risk associated with IPO investments. Immediately after an IPO, the stock price can experience considerable fluctuations, driven by market sentiment, trading volumes and various external factors. This volatility can lead to rapid and unpredictable changes in the stock’s value, potentially resulting in gains or losses for investors, depending on the timing of their trades.
Furthermore, limited information about the company poses a risk. In many cases, companies going public might not have an extensive track record or a substantial amount of historical financial data available for scrutiny. This lack of information can make it challenging for investors to thoroughly assess the company’s financial health, growth potential, and overall stability. It’s crucial for investors to acknowledge and comprehend the market risks that come with investing in IPOs. The risk of overvaluation and subsequent price correction, the uncertainty of allotment, price volatility and insufficient information about the company are all factors that need to be factored into investment decisions. By being vigilant and conducting thorough research, investors can better navigate these risks and make informed choices that align with their risk tolerance and financial goals.
What is the government’s role in mitigating the associated risks with IPOs?
In my opinion, the role of the government in mitigating the risks associated with Initial Public Offerings (IPOs) is of utmost importance. As a regulator, the government has a pivotal role to play in ensuring the integrity of the market and safeguarding the interests of both investors and the overall financial ecosystem. First and foremost, I believe that close and vigilant monitoring of the IPO allotment process is crucial. By overseeing this process, the government can help prevent any potential manipulation or bias, ensuring that the allocation of shares is fair and transparent. This is essential in maintaining investor confidence and trust in the IPO market.
Transparency is another key aspect that the government should emphasise. Requiring companies to maintain a high level of transparency during the IPO process ensures that investors have access to accurate and reliable information. This transparency extends to disclosing relevant financial data, business plans, risk factors and any other material information that investors need to make informed decisions.
Setting prudential norms for issuing IPOs is an effective step toward risk mitigation. Establishing clear guidelines and standards that companies must meet before being allowed to go public can help filter out entities that might not be adequately prepared or suitable for the public market. These norms can include financial stability criteria, corporate governance practices, and other indicators of a company’s readiness for public trading. Moreover, the government’s role in enhancing market literacy among investors is vital. Many individuals may not possess a comprehensive understanding of the intricacies of the stock market and IPO investments.
By offering educational initiatives, seminars and resources, the government can empower investors with the knowledge and skills they need to assess risks, make informed decisions and navigate the complexities of the IPO landscape. The government has a multifaceted role in mitigating the risks associated with IPOs. Close monitoring of allotment processes, promoting transparency, establishing prudential norms and providing market literacy are all strategies that can collectively contribute to a safer and more reliable investment environment. By taking proactive measures in these areas, the government can foster a market that encourages responsible participation and ultimately benefits both investors and companies seeking public funding.
It has been pointed out that despite some companies not performing well, have been given approval to issue IPOs. How do you view this?
From my perspective, the situation you have described where companies that aren’t performing well and are still being granted permission to issue Initial Public Offerings (IPOs) raises a crucial concern about the effectiveness of the regulatory framework in place. To address this issue, I strongly believe that the regulator should take immediate steps to enhance transparency and establish more stringent prudential norms for companies seeking to enter the public market through IPOs.
Transparency is the cornerstone of a healthy and trustworthy financial market. When companies with lacklustre performance are allowed to issue IPOs, it not only undermines investor confidence but also potentially exposes investors to unnecessary risks. By making the IPO approval process more transparent, the regulator can ensure that the rationale behind each decision is clear and justifiable. This transparency would hold the regulator accountable for the companies it permits to go public, fostering a more accountable and reliable market environment.
Prudential norms play a crucial role in filtering out companies that might not be ready for public trading. These norms can encompass a range of criteria, including financial stability, operational history, governance practices, and growth prospects. By establishing stringent norms, the regulator can effectively prevent underperforming or ill-prepared companies from entering the public market prematurely. This will not only protect investors from potential losses but also uphold the integrity of the market itself. Furthermore, the regulator should actively collaborate with relevant stakeholders, industry experts and market participants to develop a comprehensive set of prudential norms.
This collaborative approach ensures that the norms are well-informed, practical and capable of addressing the diverse range of challenges that can arise when companies with subpar performance seek to go public. My take on this situation is that the regulator’s responsibility is paramount in maintaining a healthy and trustworthy IPO market. Enhancing transparency in the approval process and setting up more rigorous prudential norms can go a long way in preventing companies that are not performing well from entering the public market. These measures will not only safeguard investors but also contribute to the overall stability and credibility of the financial ecosystem.
“When companies with lacklustre performance are allowed to issue IPOs, it not only undermines investor confidence but also potentially exposes investors to unnecessary risks. By making the IPO approval process more transparent, the regulator can ensure that the rationale behind each decision is clear and justifiable. This transparency would hold the regulator accountable for the companies it permits to go public, fostering a more accountable and reliable market environment”
Professor Pushkar Bajracharya, PhD
Tribhuvan University
Chief Advisor, Global College of Management
There is a frenzy for IPOs at the moment. How would you describe this phenomenon?
Well, it’s quite fascinating to witness the current frenzy for Initial Public Offerings (IPOs) in Nepal, and this trend seems to be mirrored in various other countries as well. What we are observing is reminiscent of the early days when market growth was nothing short of extraordinary. This prompted investors, both seasoned and novice, to enthusiastically embrace IPOs as a means to secure substantial capital gains, often overshadowing the importance of sustained earnings. It’s truly remarkable how there have been instances where the demand for IPOs has soared to unprecedented levels, surpassing the actual volume of shares issued.
Even in the aftermath of the Covid 19 pandemic which has presented its own set of challenges to the market, the allure of capital gains remains undiminished. This phenomenon sheds light on a prevailing inclination among Nepali investors, regardless of their stature, to gravitate towards short-term gains rather than adopting a more patient and long-term perspective. This preference for swift returns over enduring growth is further reinforced by the outcomes of numerous research studies conducted in this field. The landscape reveals a pattern that indicates many investors seem to prioritise immediate profits over sustained, gradual value appreciation.
However, it’s crucial to recognise that this trend might be driven by a certain short-sightedness. While the excitement and rush for IPOs are palpable in the short term, it’s essential to acknowledge that such levels of return might not be sustainable over an extended period. In the grand scheme of things, the allure of rapid capital gains, while undeniably enticing, could be masking the potential benefits of adopting a more patient, long-term investment strategy. As time progresses and market dynamics continue to evolve, it’s likely that the realisation of consistent, stable returns will come to outweigh the initial allure of rapid but fleeting gains. Thus, it wouldn’t be entirely unreasonable to categorise the current frenzy surrounding IPO investments as a somewhat ‘short-sighted’ approach, given the potential for more enduring gains down the road.
With the economy on a downturn, do you believe IPOs to be a good instrument to invest in?
In the current economic climate, the question of whether IPOs present a viable investment instrument warrants a comprehensive examination. The prevailing downturn in the economy, a topic that merits an in-depth conversation in its own right, can be largely attributed to the elevated cost of doing business. This increase in costs has primarily been fueled by a significant rise in interest rates, a measure implemented to counteract inflationary pressures. The sheer magnitude of this interest rate hike, a staggering 350 basis points, has substantially escalated the expenses associated with conducting business operations. Consequently, we have witnessed a reduction in both consumer demand and investment activities, thereby contributing to the overall economic slowdown. It’s noteworthy that the misalignment between fiscal policies and monetary policies has further exacerbated the ongoing economic crisis.
Despite notable improvements in liquidity conditions, the demand for loans has remained subdued due to persistently high interest rates. This divergence between deposit and lending rates within financial institutions has perpetuated the challenges faced by businesses. Given this intricate backdrop, it appears that the economic downturn will persist for a considerable period, causing the lofty expectations associated with budgetary allocations to be somewhat elusive. In light of this context, the rationale behind pursuing IPOs becomes threefold. Firstly, the market appetite for IPOs endures, with the potential for oversubscription still a plausible outcome. Secondly, the elevated interest rate environment has curtailed the prospects for leveraging financial resources effectively. And thirdly, investors possessing ample liquidity are actively exploring alternative avenues for their investments. However, it is imperative for investors to exercise due diligence and acknowledge a couple of critical factors.
To begin with, not all enterprises are destined for success, and it’s paramount to recognise this inherent risk. Additionally, whether one aims to achieve capital gains or steady returns, it’s crucial to comprehend that these rewards may necessitate a considerable amount of time to materialise. This inherent risk implies that the investment climate is conducive primarily for individuals who possess the willingness to adopt a longer-term perspective – those who are prepared to exhibit patience in the pursuit of returns. Conversely, the current economic and market conditions are far from supportive of short-term investors seeking immediate gains. While the upsurge in IPOs signifies a surge in entrepreneurial endeavours and a collective aspiration to steer the nation towards growth and development, it’s essential that these undertakings are approached with a judicious degree of caution.
Rigorous evaluation of every potential opportunity is indispensable to ensure that the journey towards investment is accompanied by a prudent sense of safety and foresight. In summation, the current landscape necessitates an atmosphere of precaution and diligence. The proliferation of IPOs is indeed indicative of a burgeoning entrepreneurial spirit, reflecting the nation’s commitment to progress and betterment. However, this trajectory should not be devoid of the necessary contemplation and scrutiny that a decision of such significance demands.
IPOs basically mean raising public funds; how robust is the due diligence when allowing companies to introduce IPOS?
Your question raises a significant and pertinent concern. The concept of Initial Public Offerings (IPOs) revolves around raising capital from the public, and it begs the question of whether adequate due diligence is conducted when permitting companies to introduce IPOs. As it stands, the current process of issuing IPO prospectuses entails the inclusion of numerous terms and conditions. However, what’s glaringly absent is a mandatory requirement for conducting a thorough due diligence audit of the enterprise by genuinely independent auditors. This lack of a mandatory due diligence audit often leads to a scenario where IPOs are brought to the market without undergoing comprehensive scrutiny. Consequently, what we often observe are notable disparities between the commitments and promises outlined in the prospectus and the actual performance of the company post-IPO. These deviations, at times, are quite substantial in nature.
Particularly noteworthy is the fact that due diligence audits should be obligatory for companies that are operational and ongoing concerns. This will ensure that an accurate and transparent representation of the company’s financial health, operational capabilities and growth prospects is presented to potential investors. Such an audit will essentially serve as a mechanism to verify the authenticity of the information provided in the prospectus, reassuring investors that the information they are relying upon is credible and reliable. What’s particularly concerning is that despite the occurrence of periodic market corrections in the secondary market, the true financial position and performance of many ventures have not been adequately reflected. This serves as a strong indicator that the existing system of oversight and validation falls short of providing a complete and accurate representation of a company’s standing.
Given these observations, there’s a resounding argument for the introduction of a due diligence mechanism akin to the audit process. This would involve independent auditors conducting in-depth evaluations of the company’s financial statements, operational strategies and growth prospects. The findings of such an audit would then be disclosed within the IPO prospectus, providing potential investors with a much-needed layer of confidence. In essence, the call for mandatory due diligence audits before IPOs is driven by a sincere desire to ensure that investors are equipped with transparent and accurate information. By bridging the existing gap between promises and actual performance, this due diligence effort would contribute significantly to fostering a climate of trust between companies and the investing public. Ultimately, the implementation of such a practice will not only enhance investor confidence but also cultivate a more transparent and accountable IPO ecosystem.
What are the market risks associated with investment in IPOs?
Your question delves into a crucial aspect of investing in Initial Public Offerings (IPOs) – the associated market risks. There are several dimensions to consider when assessing the potential risks tied to investing in IPOs. These risks encompass a range of factors that could influence the outcome of an investment. Allow me to elaborate on these market risks:
a. The foremost concern involves the inherent possibility that the venture, in which an individual invests through an IPO, might encounter failure. This risk is particularly pronounced against the backdrop of a weakened economy and a market that is experiencing sluggish performance. The broader economic context could significantly impact the company’s operations, profitability and overall viability. As a result, the returns on investment might not materialise as anticipated, or worse, the investment could result in losses.
b. The expectation of returns is a fundamental driver behind investing in IPOs. However, there exists a genuine risk that the projected returns, as indicated during the IPO process, may not align with the actual performance post-listing. Factors such as market fluctuations, shifts in consumer demand and unforeseen industry developments could all contribute to discrepancies between anticipated and realised returns.
c. Another critical consideration revolves around the feasibility assessment of the venture. It’s not uncommon for IPO prospects to be built upon optimistic scenarios that showcase the company’s potential under the best circumstances. However, the omission of more conservative or pessimistic scenarios could leave investors vulnerable to unexpected challenges or downturns. A more comprehensive evaluation that considers a range of potential outcomes is essential for an accurate assessment of risk.
d. A notable concern involves the potential for larger, more knowledgeable and well-equipped investors to reap the lion’s share of benefits at the expense of smaller, less-informed and resource-constrained investors. This dynamic can contribute to a situation where the market inadvertently becomes a vehicle for concentrating resources in the hands of a privileged few. This not only perpetuates inequities but also introduces anomalies that can undermine the efficiency and fairness of the market.
Beyond these specific risks, it’s important to recognise that the broader spectrum of market risks applies to IPO investments as well. These include both systematic risks, which stem from factors affecting the entire market, and unsystematic risks, which pertain to risks specific to individual companies or industries. In conclusion, the decision to invest in IPOs necessitates a comprehensive understanding of the diverse range of market risks. While the allure of new opportunities and potential gains is undeniable, investors must approach IPO investments with a keen awareness of the uncertainties and challenges that lie ahead. Diligent research, a consideration of various scenarios, and a recognition of the potential for market inequities are all crucial elements in making informed and prudent investment decisions in the realm of IPOs.
What is the government’s role in mitigating the associated risks with IPOs?
I appreciate your question about how the government could play a role in mitigating the associated risks with Initial Public Offerings (IPOs). There’s a host of measures that need to be taken to fortify the market, address its vulnerabilities, and transform it into a robust platform that fosters meaningful and sustainable investments. It’s undeniable that a robust market environment has the potential to incentivise ventures to seek capital from the public, which contributes to the current fervour and excitement surrounding IPOs. However, my perspective is that we need to ensure that investors, particularly those who might lack sufficient knowledge or experience, are not led astray by grandiose promises. In that context, I’d like to highlight a few key areas that require attention:
Transparency and Mandatory Due Diligence: It’s crucial to establish a framework that mandates transparency and due diligence, particularly for larger operations that surpass a defined minimum threshold. By making transparency and thorough due diligence a prerequisite for companies seeking to go public, we can ensure that the information presented to potential investors is accurate and complete. This would serve as a safeguard against misleading or exaggerated claims, enhancing investor trust and confidence.
Strengthening Regulatory Oversight: The Securities Board of Nepal (SEBON) plays a pivotal role in overseeing the market and safeguarding investor interests. However, there’s a pressing need to bolster SEBON’s capabilities and effectiveness. It’s evident that the current state of SEBON’s actions and responses falls short of the expectations set when the institution was established. Rectifying this shortfall is imperative to ensure that regulatory oversight remains proactive and robust.
Independent Analysis and Evaluation: Introducing independent mechanisms to analyse and disseminate the pros and cons of IPOs is paramount. These mechanisms will provide an objective assessment of the venture’s potential within various national and global contexts. Similar practices are widely adopted in global markets, both in the primary and secondary segments. Such analysis will empower investors with insights necessary to make informed decisions, thus preventing a herd mentality that might lead to uninformed investments.
It’s important to note that while these measures could significantly enhance investor protection, they don’t negate the responsibility of individual investors to conduct their due diligence. Every investor should exercise caution, stay informed and not solely rely on external mechanisms. In summation, fostering a conducive environment for IPO investments demands a collaborative effort between market participants and regulatory bodies. The government’s role is pivotal in implementing the aforementioned measures to strike a balance between encouraging investment and safeguarding the interests of investors. By enacting these reforms, we can aspire to create a market that not only facilitates capital raising but also upholds the principles of transparency, accountability, and fairness, ultimately contributing to the development of a resilient and vibrant investment landscape.
It has been pointed out that despite some companies not performing well, have been given approval to issue IPOs. How do you view this?
Your question touches on a crucial issue regarding companies with subpar performance being granted permission to issue Initial Public Offerings (IPOs). This situation does raise concerns, particularly in the context of Nepal’s market dynamics. I believe there are several factors at play here, and I’d like to share my thoughts on the matter. In Nepal, it’s notable that we have observed IPOs being issued at premium prices based on a company’s performance, but we have rarely seen instances of discounted IPOs. This existing approach may warrant some reconsideration. I’m of the view that treating all companies equally and allowing IPOs to be issued solely at face value might not be the most effective strategy. Instead, a more discerning and nuanced approach is required.
For instance, careful and rigorous scrutiny by regulatory bodies such as the Securities Board of Nepal is essential. The role of SEBON in evaluating the suitability of companies seeking to go public cannot be underestimated. To ensure that companies with less-than-ideal performance do not gain undue access to capital through IPOs, SEBON must adopt a discerning stance. Companies demonstrating weaker performance or financial health should ideally not be granted permission to issue IPOs at face value. This approach would serve as a safeguard against unscrupulous practices and compel investors to exercise greater caution and diligence before investing. It’s important to acknowledge that while companies with lower performance might not meet the criteria for premium IPO issuance, they should still have the opportunity to raise funds from the market, provided they do so in a manner that reflects their true financial standing and prospects.
This could involve setting IPO prices at levels that align with the company’s actual performance and potential. By adopting this approach, the market would foster a more transparent and accountable environment, where companies are evaluated based on their true merit rather than being treated uniformly. Undoubtedly, achieving these changes requires a series of corrections to be introduced within the market framework. The central role of SEBON in this process cannot be overstated. A proactive, motivated and capable SEBON is pivotal to implementing reforms that will effectively address the issues surrounding IPOs and promote market integrity. In conclusion, the situation where underperforming companies are granted IPO approvals should be critically examined and addressed. A more nuanced and discerning approach to IPO issuance, coupled with robust regulatory oversight, can contribute significantly to enhancing investor confidence, protecting the market from potential abuses, and fostering a more equitable investment landscape.
“The current process of issuing IPO prospectuses entails the inclusion of numerous terms and conditions. However, what’s glaringly absent is a mandatory requirement for conducting a thorough due diligence audit of the enterprise by genuinely independent auditors. This lack of a mandatory due diligence audit often leads to a scenario where IPOs are brought to the market without undergoing comprehensive scrutiny. Consequently, what we often observe are notable disparities between the commitments and promises outlined in the prospectus and the actual performance of the company post-IPO. These deviations, at times, are quite substantial in nature”
Nibedan Baidya
There is a frenzy for IPOs at the moment. How would you describe this phenomenon?
Interestingly, unlike a few years ago, companies preferred not to raise funds through equity, but the recent trend has been increasingly focused on public offerings. I view this as a positive move for both companies and the development of the capital market. It provides companies with the opportunity to raise capital without the long-term burden of interest. Many companies are floating IPOs at premium prices, which suggests a strong demand from investors. However, it’s worth noting that for many, investing in companies through IPOs is still a bit like opening the Pandora’s box.
The risks associated with it are not always clear, and there’s uncertainty about whether these investments will meet our expectations of high yields. Furthermore, the oversight of companies’ operations and ongoing monitoring can sometimes be lacking. In my capacity as a student of finance, I have been closely observing the market and investing as much as I can. It’s truly exciting to witness the dynamics of the market in recent days. One notable development is the increase in the number of investors, which has somewhat diluted the power of a few big investors.
Additionally, with the near deregulation in the stock trading mechanism, we’ve seen an influx of new market players entering the scene, which has led to rapid market expansion. I anticipate this trend of companies going public and the increasing participation of investors to continue, at least until there is a significant market failure or corrective actions from regulators. It’s an intriguing time for the financial world, and I’m eager to see how it evolves.
With the economy in a downturn do you think IPOs are a good instrument to invest in at present?
This is quite interesting to observe. Despite the economic hardships, there has been an increase in the issuance of IPOs by companies in recent times. This trend raises some important considerations. It’s important to note that the majority of the general public may not be fully aware of the financial details and risks associated with these proposed IPOs. As equity investors, we must be prepared to accept a certain level of risk, but I’m not entirely sure what percentage of investors applying for IPOs truly understand these financial intricacies. This lack of awareness can be a tricky and risky situation for those who assume that all IPOs are similar and can immediately generate high yields.
I firmly believe that only a select few companies have the potential to yield substantial profits for investors, and as a result, investors need to exercise caution when applying for IPOs blindly. I’ve observed many individuals applying for IPOs without adequately considering the risk and return, which has allowed companies to raise capital from a broad audience, often with small allocations like 10 shares per applicant.
However, it’s crucial to understand that investors may not see returns for years, and there may not be a proper mechanism in place to protect the interests of minority shareholders. Therefore, it’s essential to invest funds wisely and not rush into grabbing every IPO opportunity that comes along. Thorough research, understanding the financials, and assessing the company’s long-term prospects should be at the forefront of any investor’s decision-making process. Blindly chasing IPOs, especially during economic downturns, can lead to unexpected and potentially unfavourable outcomes.
IPOs basically mean raising public funds but is there due diligence done while allowing companies to introduce IPOS?
I think the role of regulators in overseeing IPOs is absolutely critical to safeguard the interests of the general public. Regulators have taken several important initiatives, such as making online transactions and dematerialisation (DMAT) mandatory, which has resulted in a significant increase in online enrolments in the share market. However, despite these efforts, financial literacy and knowledge about the market remain relatively low among the majority of the public. When it comes to IPOs, it’s not just about raising public funds; it’s also about ensuring that due diligence is conducted to protect investors. The internal controls and long-term financial viability of a company are of paramount importance to investors. There is a risk that people might be enticed by the excitement of public offerings and invest their hard-earned money with the hope of high returns, without fully comprehending the potential risks.
In our context, there are high chances of companies manipulating their financials to appear more attractive to investors. Regulators need to coordinate among themselves and take decisive actions to safeguard the public’s interests. Given that the cost of operations for investors can be high in our context, regulators should maintain a vigilant stance to protect the public. However, when we look at some recent transactions in the IPO market, I must admit that my hopes are not very high. It often feels like we’re left with nothing but wishes. Consequently, I foresee more risks entering the market in the future.
To mitigate these risks, it’s crucial to promote transparency among companies and establish mechanisms for reporting exceptions to investors promptly. This transparency will allow for proper scrutiny of a company’s situation before it goes public. I strongly believe that thorough due diligence should be a prerequisite before allowing any IPO. This approach will not only protect investors but also mitigate the risk of long-term market failure, ensuring that the IPO market remains a trustworthy avenue for raising capital and investing in the future.
What are the market risks associated with investment in IPOs?
Market risks associated with investments in IPOs are multifaceted and require careful consideration. One significant risk is that companies may be tempted to follow the trend of going public without conducting proper financial modelling and planning. This rush to IPOs, without thorough assessment and mitigation of risks, can have long-term consequences for the companies involved. Managing the leverage of debt and equity is paramount for companies entering the IPO market. High leverage can make a company vulnerable to economic fluctuations and market downturns. In our context, there’s a tendency among investors to seek immediate and high returns. In such circumstances, if the expected returns are not realised, it can lead to frustration among mass investors. This frustration can, in turn, lead to a shrinking equity market for many companies in the future.
Even though some of the current companies listed in the market may show impressive profits on paper, their dividend capacity may not meet investors’ expectations. This discrepancy between profits and dividends can be a cause for concern, as it may impact investor confidence. Furthermore, the share market is not immune to fluctuations, and factors such as rising inflation levels and uncertainty in policies can amplify the risks associated with IPO investments. These uncertainties can create a climate of unpredictability that investors and companies alike need to navigate carefully.
In conclusion, while IPOs offer companies a means to raise capital and expand, they also come with significant market risks that need to be addressed diligently. Proper financial planning, managing leverage, setting realistic investor expectations, and staying vigilant in the face of market fluctuations and policy uncertainties are essential to mitigating these risks and ensuring a stable and prosperous IPO market.
There are a few companies that are not performing well, yet have been given the go-ahead to issue IPOs. What is your take on this?
The responsibility of choosing the right investment instrument lies with us, the investors, as we’re the ones putting our hard-earned money at stake. The companies are allowed to issue IPOs based on certain parameters and can opt to issue IPOs at premium too. In such a scenario, it’s imperative for investors to exercise caution and due diligence when considering these opportunities. When it comes to investing in IPOs, it’s crucial to look beyond the surface and carefully assess the business prospects. Researching the background of the company’s promoters, understanding their history, and increasing one’s knowledge of how to interpret financial statements and projections provided by the concerned company are all essential steps. Blindly following the crowd or making decisions with closed eyes can lead to losses in the market.
It’s essential to remember that not all IPOs are risk-free, and they don’t guarantee returns that match our expectations. The oversubscription we often witness in IPOs can create a false sense of security. Therefore, investors should always consider the risks associated with each investment. We should continue thorough due diligence and adequate monitoring of companies issuing IPOs, especially those with weak financial performance as a need to continue to protect general investors, and this includes safeguarding the interests of minority investors.
As a part-time investor, I take a meticulous approach to my investments. I scrutinise the companies in which I plan to invest my money. This involves analysing the company, studying the backgrounds of the promoters, assessing industry trends, and evaluating the business prospects and operations of the company. I also consider my risk tolerance and return expectations before applying for IPOs. This helps me tailor my investment strategy, whether for the long term or short term. Also, I advise all prospective IPO investors to use their funds wisely, especially in a thinly regulated market like ours. Conduct thorough research, assess risks, and make informed decisions to protect your investments and financial well-being.
Additionally, I opine that due diligence requirements for companies seeking to issue IPOs is important and proper due diligence always involves a thorough examination of the company’s financial accounts and operations, ensuring that they are in good standing and capable of meeting the demands of public ownership. Likewise, education is key to mitigating risks associated with IPOs, so it is important to educate the public about the risks and mechanisms of IPOs. The role of private sector business associations, academia, and financial institutions to create awareness and provide resources for investors to make informed decisions is crucially important. Last but not the least a safer and more transparent environment for both companies and investors in the IPO market is important for this sector to foster in the long run
